This time next year we’ll be ‘million-heirs’

Larger individual wealth and expectation of substantial inheritances

With estate planning, you can decide what happens to your money and possessions – even your pets – if something happens to you. But estate planning is useful in other ways too: it can help you minimise any Inheritance Tax liability and ensure your wishes are carried out in the event of your death or if you need to go into care.

Put simply, Inheritance Tax is a tax charged on your estate when you die. The Government set a tax-free allowance called the ‘nil-rate band’, which is currently £325,000. Any amount above this level is taxed at 40%. Your estate is the value of everything you own, such as your house, car, investments, life assurance policies and the contents ofyour home.

UK’s massive wealth increase
One person in 25 expect to become ‘million-heirs’ and inherit an estate worth £1 million or more, according to Canada Life’s[[1] annual Inheritance Tax Monitor survey of people over 45. Around one person in 50 expects to inherit more than £5 million.

The figures reveal the financial impact of the UK’s massive wealth increase in recent decades, with rising stock markets and increased property values contributing to larger individual wealth and the expectation of substantial inheritances.

Lack of knowledge around the rules
However, without financial planning, much of the estate is likely to be lost in Inheritance Tax for assets above the available nil-rate band threshold. On an estate worth £1 million, over one fifth (£230,000) would be lost in Inheritance Tax, or roughly the equivalent of an average UK house price.
Compounding the problem is the lack of knowledge around the Inheritance Tax rules. The majority of people (70%) could not identify the standard nil-rate tax threshold (£325,000). Meanwhile, only one in 20 of those surveyed knew about the residence nil-rate band tapering for estates over £2 million, likely leading to greater tax bills for larger inheritances.

Substantial amounts of money lost in tax
People’s expectations are likely to be substantially wrong without financial planning, and it’s quite likely they could lose substantial amounts of money in tax. Yet it’s quite possible to ensure that by using a straightforward trust, the entire amount goes where it is intended – the beneficiaries.
There are several straightforward ways to reduce the amount of Inheritance Tax that is due. And for people expecting around £500,000 or more in inheritance, there is still a danger of losing tens of thousands of pounds in tax. The risk of a big Inheritance Tax bill drops to zero at the Inheritance Tax threshold of £325,000, below which there is no tax.

Source data:[1] Survey of 1,001 UK consumers aged 45 or over with total assets exceeding the standard inheritance nil-rate band of £325,000. Carried out in October 2017. Percentages may not add up to 100 due to rounding or multiple answer questions. Research conducted by Atomik.[2] The person taking out the trust must survive seven years after making the gift into the trust for the gift to become totally exempt from the estate.